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Hedge Funds Have Never Been This Bullish On Red Hat, Inc. (RHT)

A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended March 31, so let’s proceed with the discussion of the hedge fund sentiment on Red Hat, Inc. (NYSE:RHT).

Is Red Hat, Inc. (NYSE:RHT) an outstanding investment right now? Money managers are taking an optimistic view. The number of long hedge fund bets moved up by 1 lately. Our calculations also showed that RHT isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

BlueMountain Capital Management's Returns, AUM and Holdings

We’re going to analyze the latest hedge fund action surrounding Red Hat, Inc. (NYSE:RHT).

How have hedgies been trading Red Hat, Inc. (NYSE:RHT)?

At the end of the first quarter, a total of 66 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from one quarter earlier. On the other hand, there were a total of 38 hedge funds with a bullish position in RHT a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

RHT_jun2019

The largest stake in Red Hat, Inc. (NYSE:RHT) was held by Berkshire Hathaway, which reported holding $933.7 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $427.5 million position. Other investors bullish on the company included Millennium Management, Carlson Capital, and Pentwater Capital Management.

As one would reasonably expect, key money managers were breaking ground themselves. Twin Capital Management, managed by David Simon, established the largest position in Red Hat, Inc. (NYSE:RHT). Twin Capital Management had $46.6 million invested in the company at the end of the quarter. Shane Finemore’s Manikay Partners also initiated a $41.1 million position during the quarter. The other funds with brand new RHT positions are Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital, Marc Lisker, Glenn Fuhrman and John Phelan’s MSDC Management, and Manoj JaináandáSohit Khurana’s Maso Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Red Hat, Inc. (NYSE:RHT) but similarly valued. We will take a look at Xilinx, Inc. (NASDAQ:XLNX), Nokia Corporation (NYSE:NOK), Nutrien Ltd. (NYSE:NTR), and NetEase, Inc (NASDAQ:NTES). This group of stocks’ market caps are closest to RHT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
XLNX 56 1633835 8
NOK 26 386822 -1
NTR 25 389776 -7
NTES 30 3366336 3
Average 34.25 1444192 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $1444 million. That figure was $5213 million in RHT’s case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand Nutrien Ltd. (NYSE:NTR) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Red Hat, Inc. (NYSE:RHT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on RHT, though not to the same extent, as the stock returned 1.3% during the same period and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.

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